Higher Math

Steven Volla won this year's turnaround award by remaking every aspect of American Healthcare Management -- and by taking quantitative analysis to the limit

Turnaround Entrepreneur
Steven Volla, American Healthcare Management

Ever since he got out of school, Steven Volla knew he wanted to be the chief executive of his own company. He just never knew that when the time came, his would be the business opportunity from hell.

Consider this: When Volla took over American Healthcare Management Inc., at the end of December 1989, the for-profit hospital chain was just emerging from a bitter two-year-plus Chapter 11 bankruptcy reorganization. With $292 million in net revenues, AHM ended 1989 with $233 million in long-term debt. Between 1986 and 1989 the company had lost slightly more than $100 million. (AHM reported a tiny profit in 1989, but that was only because of a $30-million accounting gain from debt restructuring.)

If that wasn't bad enough, there was the hospital marketplace as a whole to consider. In the early 1980s the federal government had made fundamental, far-reaching changes in the way it reimbursed hospitals for Medicare, the federal health-insurance program for the elderly. To control costs, the government began specifying the prices it was willing to pay hospitals for given diagnoses, rather than paying based on costs incurred. Suddenly, hospitals had to control the length of patient stays in order to make money. At the same time, advances in technology were making it easier to provide care on an outpatient basis. The results were predictable: shorter hospital stays, more outpatient care -- and a resulting surplus of hospital beds. Meanwhile, because of Washington budgetary realities, Medicare reimbursement rates consistently lagged behind the increases in hospitals' costs throughout the '80s. Today about 70% of hospitals lose money on their Medicare business, says Jon Ross, a spokesperson for the American Hospital Association.

Because of all those changes, hospitals in the '80s were facing tighter margins and overcapacity simultaneously. And the growth of managed-care health plans, such as health-maintenance organizations, also began to put more pressure on hospital margins. Fewer and fewer customers were willing to pay list price for any hospital services.

AHM was particularly ill suited to compete in the new marketplace. When Volla joined the company, he could discern no real strategy behind the previous management's acquisitions; as far as he could tell, management had bought hospitals primarily because the company had accumulated capital through both a public offering and a junk-bond financing. The result was ownership of a group of smallish hospitals, none of them dominant in their market, some of them money losers, and many of them low occupancy in highly competitive urban markets.

Worse yet, AHM's hospitals had an exceptionally high rate of what are known as fixed-reimbursement payers -- that is, payers, such as Medicare, that pay pre-set prices -- in contrast to traditional insurers. From the point of view of hospital managers, who look to traditional insurance to bolster their margins, that's a recipe for trouble.

Besides, even if AHM could have made money in its marketplace, it might not have made enough. Because of the company's crushing debt load, it had interest payments of almost $29 million due in 1990 alone. After the audit of 1989, AHM's accounting firm had concluded that AHM's cash-flow problems raised "doubts about the company's ability to continue as a going concern."

Volla could see all that, but he took the job anyway. "It was premeditated suicide," he jokes today. "There were some warning signals I chose to ignore." An experienced health-care executive who had most recently been senior vice-president of operations at another for-profit hospital chain, Volla had long desired to run his own show. And looking at AHM's numbers convinced him that the company's costs were too high in comparison with industry standards, as were its accounts receivable. With the right management, he thought, the company might start making money and paying down debt.

It was a big gamble, though. To remake AHM, Volla had to cut headquarters staff almost in half, then improve the computer system so it could provide management with up-to-date comparable financial information from all the hospitals. That way Volla and his team could quickly focus on any problem areas and achieve operational efficiencies. At the same time, he stepped up the company's collection efforts and took a good hard look at the strengths and weaknesses of AHM's hospitals.

His conclusion: AHM had considerable strength in providing basic primary care (services like delivering babies and repairing broken bones), particularly to urban communities. So even though that inner-city primary-care market is one most hospitals would prefer to flee, Volla decided that under his management, AHM would do the opposite: urban primary care would be its focus, its niche.

With that in mind, the company would ration its scarce capital very carefully. Since most excess cash had to be used to pay down the crippling debt, top management would compare and prioritize all hospital capital requests. It would approve only those that best met the company's primary-care focus or that were needed to keep the hospitals functioning well. "We were just going to be a boring bread-and-butter company," Volla says.

The results of that strategy were dramatic. After losing money in 1990, AHM has been consistently profitable, improving earnings before interest, taxes, and depreciation by 80% between 1989 and 1992. By the end of 1992 real debt had been reduced by $78.1 million through a combination of payments and a successful debt-for-equity swap. Thanks to AHM's improved financial prospects and falling interest rates, the company's average real interest rate dropped by 40%, from 13.1% in 1990 to 7.9% by the end of 1992. Meanwhile, AHM's stock price jumped, from $1.63 a share in January 1990 to $5 at the end of 1992. By 1993 the company was doing well enough for its stock to list, for the first time, on the New York Stock Exchange rather than the American Stock Exchange.